Directions of the CSR movement

For the past five decades we have seen a tremendous development within the CSR movement from a few hippies in the sixties shouting curses at Dow Chemicals to businesses build on the idea of sustainability such as the Body shop and Starbucks. This blog is about what I think will happen in the next few years. The list is far from complete but gives an overview of some of the trends that will shape CSR in the coming years.

Codes of conducts as a “license to operate”. Code of conducts was, a few years ago, seen as a source of competitive advantage, and to some businesses a method to organise its philanthropic efforts. Today they are seen as something that most international businesses have as part of their normal business approach and more a given than an extra feature. Even companies like A.P.Møller-Maersk that until recently did almost nothing within sustainability is now implementing Codes of Conduct and have become member of the Global Compact.

Moving from a fragmented approach to CSR companies now work strategically with philanthropy and stakeholder engagement/management. As described by Porter and Kramer there are real advantages to be gained by working strategically and long-term with the company’ philanthropic activities (Porter & Kramer, 2002). And companies are using philanthropy to gain access to students and other important resources that they will need for their future growth. Apple computers have successfully engaged with university students as part of their strategy, which has moved the company from being marginalised in the market to be directly comparable with Microsoft.

The further evolution of sustainable and social risk management into real tools for business. Where companies engaged with stakeholders because they represented a business risk they would in the future also be part of business development. Globalization have meant that business have expanded its scope and reach significantly. Fuelled by waves of liberation in developing and emerging markets have initiated a significant increase in contact with countries and regions that can be categorized as difficult to do business in. The increased sphere of contact and influence have spread to every coroner of the world and is to a large extend fuelled by the prospect of high returns, first mover advantages and market shares (Haufler, 1997, Mehmet, 1999, Banfield et al., 2003, Gouldbourne, 2003,

Jamali & Mirshak, 2010). According to the World Bank some 1,5 billion people are affected by organised violence or conflicts (World Bank, 2012), this number constitute roughly one fifth of the total population of the world making it one of the world’s biggest social issues. Conflicts are present in all parts of the world and have a direct or indirect impact on the lives of everybody on the planet either through social ties or as part of our professional lives. For people who are directly affected it is an ever-present threat that invades all activities and decision making processes, for the societies involved it puts social lives and development in a state of suspended animation. To a large extend the issues that business needs to confront are outside what can be considered the norm within traditional risk management strategies (RMS) because the issues are socially embedded and complex (Holzman et al, 2003). As seen in the case with Starbucks NGO and companies can work together on areas of common interest and create new products and services (Austin & Reavis, 2004).

Social responsible investments or SRI will become more and more influential on driving investment decisions and thereby the choices of management. It is not argued that investment companies will become more social conscious but customers like institutional investors will become more and more concerned about how they are growing their portfolios (Hawken, 2004). This will not happen because they suddenly become aware that they have a significant social or environmental impact but that the customers of instructional investors are starting to wonder how their pensions are growing.

The raise of the corporate citizen. The idea of corporate citizenship was first seen a few decades ago (Crane & Matten, 2010). The idea of corporations as citizens with obligations and rights really saw its emergence with several big international finance scandals such as scandal around Enron and Arthur Anderson around the turn of the century. The idea of a corporate citizen comes from the notion that companies like people have an obligation to the community they are part of. This means that they are obliged to behave in accordance with ethical norms formulated by society. In many ways the corporate citizen come from the idea of engagement with salient stakeholders and acting in accordance with their expectations and wishes. While there are many companies that claim corporate citizenship a very have moved beyond mere rhetoric.

The inter-linkage between CSR and development studies. Will further develop and as we will see in this book gender will be one of the lessons learned from the field of development studies that will define corporate behaviour in the years to come. For decades development practitioners have known that economic growth, democratisation and security does not happened in a vacuum and that development a sustainable business climate is linked to society and governance structures. As companies increasingly becomes global even at very early stages of business lifecycle so does the issues that they have to confront. But as older companies have had time to cope with different cultures and business environments young entrepreneurs does not have the same privilege. In essence this means that they will have to experience a much steeper learning curve of they are going to survive on the global marketplace. The tools that have been refined through years of development studies will be an integrated part of creating a sustainable business platform for the future.

Since the 80’ties have seen large-scale privation of traditional state enterprises in areas like transportation, communication, healthcare, energy and infrastructure. Mostly influenced by neoliberal thinking in United Kingdom and United States were large-scale privatisation programs were implemented under Margret Thatcher and Ronald Reagan (Bhagwati, 2007:98, Harvey, 2005:57ff). As this happened private business also found its way into areas traditionally controlled by the state and as time have progressed more and more areas have seen either total takeover by private business as we have seen in telecommunication, part privatisation with majority state ownership as with railroads or private companies in direct competition with or as a alternative to state institutions as we have seen in Healthcare and Private security companies (Harvey, 2005, Dicken, 2003, Klein, 2000, Friedman, 2007).

The concept of CSR have found it’s way into the business world largely due to the weakening of the state and as a result of pressure by stakeholder groups to act as information have been more widely available from even the most remote part of the world. Word like ‘Sweatshop’ and ‘child labour’ would not have found its way into everyday language if it had not been for the increased transparency and persistence of stakeholders who have come forward within the last two decades.

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CSR as Standards and Reporting

Logo of Global Reporting Initiative

Last week I had a short blog about stakeholder engagement and some of the events leading up to the tendency for businesses and organizations to look beyond clients and suppliers. But in order to be effective a systematic approach is needed that will enable organizations to categorize and absorb the knowledge gained from a more outgoing approach.

Other forms of stakeholder engagement can come through compliance and reporting on the corporations’ ability to conform to certain standards. There are many good reasons why corporations engage on compliance strategies. The main arguments are:

  1. Stamp of approval through accreditation
  2. Attractiveness to social responsible investors, and
  3. Branding the company as a social responsible member of the community (Locke et al, 2006:1f).

Initiatives such as Global Compact (GC), Global Reporting Initiative (GRI) or the supplementary Principles for Responsible Investments (PRI), enables companies to increase their transparency level (United Nations Global Compact, 2008, UNEP Finance Initiatives, 2005, Global Reporting Initiative, 2006). Some of these initiatives are sponsored by the United Nations (UN) and thereby giving companies that abide to the standards, a stamp of approval from a world recognised institution. Other standards organisations are private or semi-governmental institutions that have created systems for governing sustainable behaviour as for example systems issued by the International Organisation for Standardization[1].

Systems can also be grouped by industry or be customized to the individual company where they are called Code of Conduct or similar systems. Common for Codes of Conduct are that they in some form are linked to universal agreed treaties such as the human rights, labour standards or environmental agreements. There are, however, some drawbacks in relying too heavily on these systems. A company like e.g. Nike has adopted a comprehensive Code of Conduct system of standards and control which both rely on internal and external auditing, but has found that this does not safeguard the company from criticism on labour standards in its supply chain (Locke et al, 2006). The lessons learned from Nike is that standards and systems should not stand alone but should be complimented by other forms of stakeholder engagement such as joint training with suppliers and frequent meeting activities both formal and socially to increase cultural exchange between the parties (Locke & Romis, 2006).

The second driver for stakeholder engagement can be the access to social responsible investors. While only a few years ago the Social Responsible Investments (SRI) constituted a fraction of the total investment portfolio it was in 2008 representing investments of over 18 trillion USD (UNEP Finance Initiatives, 2005). For many companies it can be a benefit to be part of a SRI portfolio as it gives access to funds that other companies might not have access to. In addition, the system of control and auditing can enable the company to streamline its processes and get rid of organisational risk that might affect long-term profitability. Investigations into the link between profitability and CSR shows that companies that rate their CSR effort positively also have a significant better financial performance than companies that does not (Economist, 2008:6).

The third reason for adopting a compliance strategy is the potential for positive branding. The GC is now consisting of approximately 5000 companies (United Nations Global Compact, 2008) from around the world. Grouping with other well-branded businesses who subscribe to the GC standard can boost their corporate brand and increase the collective brand value of all. Other companies use CSR actively to differentiate themselves in an otherwise competitive market.

Limits to Transparency

If only the world could be more transparent it would be a much better place to live in. Companies would behave more responsible, Governments would be able to enforce rules, regulate much more effectively and people in general would have a much better idea about the powers influencing their everyday lives.

Transparency has been the mantra of the CSR movement we have hailed the word on numerous occasions on every seminar I have ever attended. When companies have come to us we have told them that If only they were a little more transparent they would not be in the mess that they are in right now! Or we have preached to them that the only way to protect themselves is if they can report on a few more indicators in order to quantify their processes and show that they are truly sustainable.

I have worked with these systems for the past 15 years and I know every one of them from A to Z. I wake up at night reciting ISO26000 on Concepts, Terms and Definitions and I know the weak points in the Global Compact and all the companies that cut corners to be part of the sustainable business movement and being FB pals with Ban Ki-Moon.

On of my friends Michael Koploy send me an entry he made on 5 Questions to Start the Sustainable Supply Chain Conversation and it made me thinking about some of the things that we continue to talk about but keep missing. He does argue for more transparency, as we all do, but also that we should take a look beyond the apparent and into the DNA of the company. The “what are we all about”-question of sustainable business. How do we get managers to think for themselves, their business and the society that they are part of at the same time?

We produce incentive plans and bonus schemes, but it did little or nothing to prevent greed and poor ethics during the initial stages of the financial crisis. We created lists of “good” companies, but they do not seem to do much better than the ones that are “bad”. We have systems upon systems that produce endless reports that only a handful of people actually read. So what is the answer to creating a sustainable DNA for business leaders?

Well for starters we should take a good hard look at our educational system both the public and private ones. What are we actually teaching our coming leaders about how to run a business? Are we teaching them how to create a sustainable business model in more than financial terms or have our business schools and universities become temples of past ideologies? I do not talk about revolution or throwing professors out on the streets (even though some of them might need to go that way), but about taking a hard look at what we actually teach our students. We know that blindly following the thinking and guidelines of Keynes, Hayek or Friedman only works in the short run (Keynes smiles) so why not take that insight seriously and bringing it into the lecture hall.

Secondly we need to make shareholders/owners accountable. It will be a significant step away from what we have been used to be doing until now and nothing like business as usual. For too many years one could have an ownership form where one could own a company but not be accountable for its actions. We appoint a board of directors, but we do not really care who they are or what they are doing, as long as they keep producing the results that we want them to. In the process they become complacent and distant from the decision making process. And when things eventually go wrong they are often caught unaware of what have been going on right under their noses.

It would be presumptuous of me to say that I have all the answers, but I do know that its takes more than measuring to create a sustainable business as Michael points out. CSR is more a symptom of a financial ideology that have been over interpreted and gone wrong than an independent movement. Our never-ending quest for accountability and transparency will not succeed until we realise that we need to make some changes to how business operate and we do not do this by replacing with just another ideology.

Carving up the elephant

CSR is never going to last. It is a management fling, which will go away in a few years. It is what we have always done noes we just call it something fancy…

For most laypersons the concept of CSR is like a very big elephant that is impossible to understand the size and reach of. There seem to be no end to what is included into the realm of CSR as long as it has to do with stakeholders, ethics, the environment or any of the other labels, which are included. And if one does not understand something it is easier to dismiss it all together than try to understand what the concept brings to the table of progressive business development.

In my thinking it is about your ability to take this ever expanding and complex concept into something that can be managed and developed in an organisational setting.  The Global Compact, OECD guidelines for multinationals or the private ISO26000 are all attempts to carve up the elephant up into manageable pieces. Not that any of these approaches are flawless, but they do represent systems that business can use to manage their CSR activities and create a meaningful framework.

The important thing to think about when creating a CSR framework for business is that it has to be directly related to what the business do. So if one is in transport your effort have to be about how CSR helps you business be even better at what it does. Too many times I have seen CSR reporting and initiatives which are detached or represents a remote connection to strategies and mission.

My advise to business would be that rather than doing a half-hearted effort, it would be better to focus on areas outside CSR which brings more value such as systems for governance, quality or excellence in process management. When the business matures and internal systems can support the effort, there is a much better chance of success with systems like CSR that goes beyond the close stakeholders.

Where there is smoke there must be fire – EU CSR policy measurement for success.

In my short series n the new EU CSR regulation I have come to the subject of EU CSR performance. Within the document there are a list of success stories highlighting what have been achieved since the last revision in 2006. The focus is on the normative institutions, which have been established and that companies have started to adhered to (on a voluntary basis of cause).

According to the CSR policy there have been significant progress in the commitment to sustainability issues from companies in the EU.

“The number of EU enterprises that have signed up to the ten CSR principles of the United Nations Global Compact has risen from 600 in 2006 to over 1900 in 2011.”

While it is nice that the number of companies and organisations who are participating the UN global compact is rising it is hardly to be a considered a success factor in itself. Of cause it depends on your perspective and what you believe that CSR should be about but basically the commitment to UN Global compact is not a set of actions it is rather a communication about a future action that you might or might not take.

Last year around 2000 organisations were thrown out of the GC because they were unable to produce a communication on progress (COP) whish is the document that you commit yourself to produce when signing up. It is a common mistake that one screen for signing up for the GC rather than to look for the COP, which at least give some basic verifiable data to look at.

The EU regards the “promise to commit” tangible proof that companies are committing themselves to the CSR cause on a bigger scale. And to the true believer this might be enough proof that CSR is really working, that organisations and companies are participating whole heartily in the movement. While this would be nice there are also some who suggest that companies participate not for the good of the world but because it reduces the risks it is subjected to and that CSR is a novel way to market your brand and your products.

So when the EU promotes the signing of different normative standards as a success indicator for CSR it is only one side of the truth. It would seem that the EU uses the criteria “where there is smoke there is fire” as a measurement for success.

Pros and cons for third-party evaluation of SRI investments

How much should you trust third party evaluation of your SRI portfolio companies? As a SRI interested investor or researcher you might want to have some their party have a look at the companies that you are investigating but how much can you really trust their evaluations? This question comes up more and more frequently as third part evaluations become much more freely available.

I have compiled a short list of issues that you might want to take a look at when evaluating if the intelligence can be used in your investigation of companies.

  1. Transparency is of cause a major concern and just because a report or paper is made from somebody outside the company it does not necessary make it more useful. It is not that third-party investigations are necessary biased but you need approach their reporting in much the same way you would corporate self-evaluation and reporting, with a fair amount of scepticism. Take a look at how they present their data and look for their source of information is if the raw material is available for your own analysis it is the best if they only present the conclusions then take it with a grain of salt.
  2. To what extend does the analysis base its conclusions on Corporate data? A lot of analysis only have corporate self-reporting as it source but might come up with very different conclusions that internal analysis came up with. What you need to do is look for triangulation of data sources. Were interviews or questioners conducted during the process, were experts included and what was their background (if it is just people from the analyst own group they might not be as reliable as other experts might be) or were data verified by other means. I recommend that you at least look for one other source of aw data other than corporate information. This will show you that some efforts were put into doing the report and some level of forensics were conducted.
  3. The analyst themselves can have a big impact on how reliable the data is. Some analysis are doing the analysis on a part time basis while others does it for a living. This does not mean that the work of the amateur cant be very valid it just means that when you evaluate technical data you might place more reliance on what the professional have to say. The person who sits with data on finances, CO2-emissions, supply and value chain data have a great deal of routine in looking at these numbers and have a good idea when they are off the mark so to speak.
  4. Standards are a big issue within CSR not just because they are evaluated against but also because they are seen as normative truths. We all know standards like the Global Compact (GC) and reporting according to Global Reporting Index (GRI) or the new ISO 26000 but just because standards are used they o not constitutes the truth. Look at them as a way to present data not as a factor for goodness. A A+ rating just not represent a higher degree of goodness than a C rating in GRI it just shows you what corporate data should be available to you for analysis.
  5. The Scope of data within CSR is constantly being debated. Some would include everything others limit their scope to just include the 10 principles in the GC. When you do your analysis you should scope what you perceive as valid data and collect sources of material that fits this scope. If you find evidence that is outside the scope but have a impact on your analysis you should put it aside for further analysis later one when the rest of your investigations have been included. This exercise will help you not only evaluate your ability to create a correct scope but also understand the complexity of your target company.
  6. Academics or not just academics. I would whish that academics could be seen as beacons of truth but the fact is that many have to make a living too and some do this by making reports for different institutions. This does not mean that it is not quality work that is being produced it just means that you can look at the reporting as you would a academic paper which have been evaluated by peers. Do not judge a report by the name on the cover.

Combating Corruption, Bribery and Fraud

For the past few months I have been working on a project that should end up in a management system that would support the 10th principle of the Global Compact.

While we in many ways have embraced the potential that these changes have brought with them, there are also worries that the face of corruption and fraud will change in much the same way. Just as new possibilities for wealth creation have emerged, so have new avenues and possibilities for Bribery, Fraud and corruption.

Some efforts have been made to combat the increase in corrupt behaviour, which in themselves are good and live up to some of the very principles that we think highly off. But at the same time, there seems to be no decline in world corruption or fraud for that matter.

The 10th principle of the UN Global Compact concerns the subject of Corruption and how organisation deals with the subject. According to UNs own communication, this has been and continues to be the most difficult area to work with. While most signatories of the GC have identified the area as being a major obstacle in their work, very little evidence has been found that companies are effectively combating corruption. For instance only 20% of signatories had an anti-corruption policy that related to their own supply chain.

The OECD Convention on Bribery of Foreign Public Officials in International Business has created a framework from which business, governments and NGO can work together to combat corruption. And while the charter does subscribe a way for business to understand and articulate how corruption affects their operation it does not give any concrete advice on how anti-corruption work should look like in the field.

The aim of the Copenhagen Charter is to remedy this discrepancy and create a real, tangible and systematic approach to anti-corruption work in business and organisation in general. Based on these guidelines I have been part of the process of formulating and creating a working platform from which such work could be undertaken. The process have led us to a point were we now have 13 core principles and a auditing-system from an were BFC effort can be undertaken.

The principles are:

  • Ensure that a Code of Ethics or Code of Conduct is implemented which is inline with international institutional norms and which promote high ethical standards.

Codes of ethics form the backbone of the organisations work against corrupt and fraudulent behaviour. It formulates the practical guidelines that all employees need to follow within the organisation in order to comply with the guidelines set by the board and executive management. Both corruption and fraud can be difficult to identify and employees in the field need to know exactly what the corporate policy is for accepted behaviour for receiving or giving gifts or how to bid for contracts. A Code of Conduct helps the employee take decisions and identify situations, which can lead to issues of concern.

  • Organisations implement a sufficient level of financial and operative independence. Furthermore the organisation needs to implement internal and external audit coverage with the aim of uncovering corruption and possible fraud.

Auditors should be able to operate freely within the organisation. Even though most audits do not uncover corruption or fraud, is the independence of auditors send a powerful message to would-be whistle-blowers that an independent and unbiased system of control exists.

  • Develop a system that encourages both employees and managers to communicate and report, to the relevant independent body all irregularities. Implement a procedure that ensures that these reports will be taken serious by the receiver, who has the power and authority to do investigate the claim.
  • Implement an effective communicative system with local and regional authorities that ensure that the organisation’s work is transparent and auditable by both governmental and organisational auditors.

Working together with local and national governmental agencies will enable one to create a system which is transparent and auditable not only by the organisations own auditors but also from third parties. Third parties will have other ideas and insights into local conditions, which is hard to get insight into as an international corporation.

  • Organisations need to work with government officials and organisations in order to create guidelines and systems for disclosure of governance practices and transactions between the two parties.

It is the obligation of both the company and the governmental agencies that it works with to disclose as much information about their transactions as necessary to prevent dishonest behaviour. However, a system is needed in order to efficiently and effectively spread information to the relevant stakeholders’, in this case governmental agencies, who have a interest.

  • Designated and qualified staffs within the organisation have to play an active role in evaluating the efficiency and effectiveness of financial and internal control systems on a regular basis. On a regular basis they need to follow up on recommendations related to Corruption and Fraud Detection.

Like any other monitoring system, a systematic approach to anti-corruption and fraud monitoring and detection, needs some form of efficient mechanism for updates. The ways in which these types of acts are committed is constantly changing and is being developed mainly because corruption and fraud is a crime in most countries and perpetrators have to develop their techniques in order not to be prosecuted.

  • The organisation needs to focus its control and audit strategies more on areas and operations prone to fraud and corruption by developing effective high-risk indicators, which can be effectively measured and managed.

What gets measured gets managed is a old saying within management, but one needs to know what to measure before an effective system can be put into place. Every company and industry is different and subject to their own dynamics and business culture. Within fraud and corruption there are no universal system that can just be implemented.

In order to effectively combat devious behaviour one must incorporate the dynamics of the business if one is to be successful. It is therefore essential that any system is based on local and industry knowledge and that people with the appropriate competencies are involved in the formulation of the systems indicators.

  • Use multiple communications means to distribute your audit reports and invite stakeholders to participate in the investigation and establishment of a transparent organisation.

One of the most effective anti-corruption and fraud systems that can be implemented is to invite everybody to look inside, so that a critical look can be taken on the audit process. An auditor who thinks he knows everything knows nothing and by inviting stakeholders to participate in the continued investigation, one can create a basis of continued evaluation and transparency in the organisation.

  • Communicate in a language that stakeholders of the organisation understands

If you communicate in a way, which alienates your audience, you will never be able to reduce corruption in your organisation. One might argue that using technical language will be more accurate and the from a legal point of view it would be more correct but the fact is that if you want people to read and understand what you are trying to say, then the reporting needs to be understandable.

  • Use a network approach to combating corruption and fraud.

White-collar crime is a cross border discipline and as with the rise of globalisation, there is a need for business to learn, share and exchange knowledge from other parts of the world. No organisation is an island and if the business is divided on the fight on corruption and fraud it will ultimately loose the battle. Using a network approach and gartering resources from all levels of the organisation to be the eyes and ears of the organisation enables a much more effective intelligence on what is going on. While the information gathered might not directly lead to disclosure of crime, it highlights areas where there could be parts of the system which are not transparent and therefore can be subject to covering up wrong doing.

  • Ensure that systems for the effective exchange and proliferation of knowledge are ensured both inside and outside the organisation.

Like the network approach can be used to gather information, it can also be a effective way to communicate with all parts of the organisation. In the information age, organisations need to have a reliable system for communicating with key stakeholders in order to combat rumours and getting a voice in a otherwise overcrowded media scene. If a company is branded as being corrupt or subject to large-scale fraud, it can cost its ability to conduct business and if it needs to establish channels of communication after the event, it will often be too late.

  • Ensure that the systems for evaluation and incentives for management are established which support anti-corruption and fraud efforts in order to motivate employee ethical behaviour.

One of the major issues within corporate incentive plans is that they have often led to or initiated corrupt behaviour because of their design. The way in which companies compensate their managers and executives, have to be designed in a way that reduces the possibility of corrupt or fraudulent behaviour from occurring. This can example is through improved transparency in the incentive governance structure or third part validation of performance indicators. In high-risk regions, a managerial and specialist rotation program can also be in place in order to reduce the chance that top executives becomes too involved in the local business culture.

  • Ensure that the organisation proactively functions as an example to be followed on fraud and corruption through international committees and working groups.

The ability to be innovative and more efficient is not only limited to other areas of business but also just as much within the field of auditing and governance. As knowledge within the organisation about fraud and corruption is increased, so is the ability to find new ways and systems for efficient governance in these areas. Working cross-culturally and tapping into these streams of knowledge allows an organisation as a whole to progress and innovate new ways to manage these areas. A committee function allows for effective management and the development of best practice techniques that eventually can find its way into the Code of Ethics or as part of the audit process system.

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